Economic Highlights for the week ending December 14, 2007

Economic Week In Review: Fed Cuts Short-Term Rates

Vanguard 12/14 - As anticipated, on Tuesday the Federal Reserve Board lowered short-term interest rates by 0.25% to 4.25%. The Fed's action kicked off a busy week for economic reports. On the bright side, November's retail sales soared and industrial production increased, while jobless claims declined. Meanwhile, the U.S. trade deficit rose, business inventories decreased, and two inflation indicators rose steeply because of higher energy prices. For the week, the S&P 500 Index fell 2.5% to 1,468 (for a year-to-date total return of 3.5%). The yield of the 10-year U.S. Treasury note rose 12 basis points, to 4.24%.

Vanguard 12/14 - Disappointing those who were hoping for a more aggressive cut, the Federal Reserve Board's Open Market Committee (FOMC) voted to lower the target for the federal funds rate by 0.25%, to 4.25%. Tuesday's action followed rate cuts of 0.50% in September and 0.25% in October. In the accompanying statement, the FOMC cited slowing economic growth caused mainly by the housing downturn and "some softening in business and consumer spending." On Wednesday the Fed unveiled a plan to inject cash into the markets through the auction of short-term funds and open foreign-exchange swaps with central banks in Europe, Canada, Great Britain, and Switzerland.

Bear Stearns 12/11 - Boston Fed President Rosengren dissented in favor of a 50-basis-point rate cut. 

The Federal Reserve Board also cut the discount rate by a quarter-point to 4¾%.  The discount rate cut was requested by seven of the twelve Reserve Banks.

Under the circumstances, this was the smallest step that the Fed could have taken and we are somewhat surprised that the Board of Governors did not elect to cut the discount rate by 50 basis points.  The Fed continues to couch its policy actions in terms of their impact on economic growth rather than admit that the primary motivation for Fed action is the turmoil in the financing market—turmoil which may become worse as a result of the miserly action on the discount rate. 

Vanguard 12/14 - In November, retail sales jumped by 1.2%, a sharp increase over October's figure of 0.2% (revised up from 0.0%). Though automobile sales decreased, non-auto sales expanded by 1.8%. With November's higher price for crude oil, sales at gasoline stations led growth. Still, despite higher energy prices and the drag from housing, consumers continued to spend, particularly on clothing, electronics, and appliances.

Bear Stearns 12/13 - Thus far, evidence of a spillover from housing to consumer spending remains tenuous at best.  Retail sales in November may have been boosted by the early Thanksgiving, which might not be properly captured in the seasonal adjustments.  If this is the case, December spending could be quite soft. 

Vanguard 12/14 - Wholesale prices jumped 3.2% in November, the second-highest increase since this data was first reported in 1947. The increase was driven almost exclusively by a 14.1% surge in energy prices; excluding food and energy, producer prices for finished goods rose by just 0.4%. Increases in the prices of passenger cars and light trucks also helped to boost the core PPI.

Bear Stearns 12/13 - Overall finished goods PPI prices surged 3.2% in November, massively above expectations.  This pushed the year-over-year overall PPI inflation rate to 7.2% in November (the highest since October 1981!) from 6.1% in October.

The year-over-year core PPI inflation rate moderated to 2.0% in November from 2.5% in October.

Vanguard 12/14 - With its largest increase in two years, the Consumer Price Index (CPI) jumped 0.8% in November on a seasonally adjusted basis, on the heels of a 0.3% increase in October. The main culprit was higher energy prices, which have risen an annualized 34% over the past three months. The core index, which excludes food and energy, increased only 0.3% in November. Over the past year core CPI inflation has been running at a 2.3% pace.
Bear Stearns 12/14 - The 12-month overall CPI inflation rate jumped to 4.3% in November from 3.5% in October.

All three inflation reports for November have shown a sharp pickup in overall inflation.  Although we still think it likely that the Fed will cut rates again in January, it is a central part of our forecast that higher inflation in 2008 will force the Fed to reverse course on rate cuts in the second half of the year.

Vanguard 12/14 - Beating expectations, industrial production rose 0.3% in November, following a downwardly revised 0.6% decline in October. Manufacturing output rebounded, rising 0.4%; mining output rose 1.1%; and capacity utilization rose to 81.5% from a downwardly revised 81.4%. Business equipment production also rebounded.

Bear Stearns 12/14 - This report provides further evidence that the economy grew at a moderate rate in November.

Vanguard 12/14 - Initial jobless claims dropped for the week ended December 8 by 7,000 to 333,000, from the previous week's upwardly revised figure of 340,000. Still, it is clear from the four-week moving average that claims have grown over the fourth quarter, starting at 310,000 and now averaging appreciably higher. The trend points to an increase in layoffs, consistent with the anticipated economic slowdown.

Bear Stearns 12/13 - Initial jobless claims fell by slightly more than expected, down 7,000 to 333,000 in the week ending December 8th.  The four-week average of claims fell 2,000 to 338,750.

Though still modestly elevated, the level of jobless claims remains consistent with continued expansion in employment.

Bear Stearns 12/11 - Wholesale inventories were lower than expected, remaining unchanged in October.  In addition, September wholesale inventory investment was downwardly revised to 0.6% from a previously reported 0.8%.

Although the decline in wholesale inventories in October likely points to a larger inventory drag than we were previously expecting, the continued decline in the I-S ratio is uncharacteristic of an economy that is headed toward recession.  When inventories are lean in relation to sales, it reduces the chances of significant production cutbacks to rebalance inventory levels.

Vanguard 12/14 - The Commerce Department's Bureau of Economic Analysis reported that the U.S. trade deficit increased by 1.2% in October to $57.8 billion, above consensus expectations and $0.7 billion more than September's revised deficit of $57.1 billion. Both exports and imports increased for the month, though imports increased more than exports largely because of the increase in crude oil prices. The deficit with China grew to $25.9 billion. Compared with last year, however, the trade deficit declined by 1%; exports rose by 13.7%, while imports rose by 9.2%.

Bear Stearns 12/12 - Although real export growth has slowed in recent months, it continues to outpace imports and the decline in the real trade deficit looks likely to add again to growth in the fourth quarter. 

Bear Stearns 12/14 - This is another busy week on the economic calendar. We get the NY Fed empire state index, the TICS report and the NAHB homebuilder index on Monday. Tuesday brings housing starts and permits data. Weekly jobless claims, the final revision to 3Q07 GDP, leading indicators and the Philadelphia Fed Index will be released on Thursday. Friday brings personal income and spending data, core PCE price inflation and the revised Michigan consumer sentiment reading for December.